Author Topic: Confused about IRA tax deduction  (Read 1298 times)

Brokefuturedoctor

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Confused about IRA tax deduction
« on: May 17, 2016, 02:15:09 PM »
So according to the follow link/table, you cannot claim a deduction for traditional IRA contributions after a certain level of income.

https://401k.fidelity.com/public/content/401k/home/vpcontributionlimits

My thought was that since I'm going to be a doctor one day then there is probably no reasonable income that would be beneficial to have a traditional IRA right? During residency, I will be around 50k/year, and after residency my salary will most likely surpass the deduction limit for a traditional IRA which makes a backdoor Roth more beneficial.

Second, it seems to always make sense to contribute to a 401k or 403b because from what I can tell that amount is deductible at a high income limit. Is there even a limit?

Thanks in advance for your thoughts/input!

MDM

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Re: Confused about IRA tax deduction
« Reply #1 on: May 17, 2016, 03:01:51 PM »
My thought was that since I'm going to be a doctor one day then there is probably no reasonable income that would be beneficial to have a traditional IRA right?  During residency, I will be around 50k/year,...

All depends on your marginal rate when contributing vs. your marginal rate when withdrawing.

Marginal rate is not necessarily the same as tax bracket, due to various credits, phase-outs, etc.

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and after residency my salary will most likely surpass the deduction limit for a traditional IRA which makes a backdoor Roth more beneficial.
Or direct Roth, if your MAGI is above the deductible limit but below the direct Roth contribution limit.

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Second, it seems to always make sense to contribute to a 401k or 403b because from what I can tell that amount is deductible at a high income limit. Is there even a limit?
Yes, this makes sense.  There are some nuances about limits involving "highly compensated employees" but that's a topic for later discussion. ;)

Telecaster

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Re: Confused about IRA tax deduction
« Reply #2 on: May 17, 2016, 03:44:21 PM »

My thought was that since I'm going to be a doctor one day then there is probably no reasonable income that would be beneficial to have a traditional IRA right? During residency, I will be around 50k/year, and after residency my salary will most likely surpass the deduction limit for a traditional IRA which makes a backdoor Roth more beneficial.

Exactly right.  If you don't get the deduction, then there is no upside and plenty of downside to the tIRA.   So backdoor Roth is the way to go.

As an aside, I do the backdoor Roth, and glad I can, but it is a tax loophole that really should to be closed.   

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Second, it seems to always make sense to contribute to a 401k or 403b because from what I can tell that amount is deductible at a high income limit. Is there even a limit?


Max those babies out!  And it is even better than that because the deduction comes at your highest marginal rate.  But the withdrawals start off at the lowest marginal rate.   So a 401(k) helps you avoid a ton of taxes. 

MDM

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Re: Confused about IRA tax deduction
« Reply #3 on: May 17, 2016, 03:56:44 PM »
...the withdrawals start off at the lowest marginal rate.
Depends what is meant by "start off".  For any given year of traditional contributions, the withdrawal taxes start on top of the income already "baked in" due to previous years' traditional contributions, SS, pension, taxable dividends, etc.